Horia Braun-Erdei, General Manager, ING Investment Management on post-crisis financing in Romania

"Although we are now more than 5 years past the climax of the global financial crisis, its consequences are still very much with us. Moreover, their nature spills over the economic and financial domain, possibly spanning into the social psyche of the wide public."

Q: How are the banking and non-banking segments of Romanian's developing financial markets coping with the aftermath of the global financial crisis?

A: Although we are now more than 5 years past the climax of the global financial crisis, its consequences are still very much with us. Moreover, their nature spills over the economic and financial domain, possibly spanning into the social psyche of the wide public. Without using the rigors of an academic expose, I would  argue that at least two types of behaviors have changed. For instance, along with other fellow citizens of the world, Romanians have given away some of their spending exuberance from the pre-crisis times for a more thrifty, if not lifestyle then at least attitude towards their personal finances. The Romanian public’s increasing savings rate and their decreasing demand for loans suggest such a move in their attitudes, along with what businesses may find as a more selective and cost-conscious spending behavior. A second attitude that may have changed is that towards risks and more particularly financial risks. Within the financial industry, the increase in the risk aversion was all too much visible in the recent years through a massive move into low risk assets which is still yet to reverse. But the risk aversion was further reinforced by regulators and policy makers who – belatedly as always – rushed to penalize risk taking behaviors, making the crisis even more painful in the short term, as risk takers often act as counterbalance to animal spirits getting scared in tough times.

How did the above mentioned changes affect the Romanian financial market landscape? Within the banking industry, the deleveraging process is clearly linked to both of the above changes. The increased thrift of the public, along with excess liquidity creation by central banks and combined with increased capital requirements, more conservative risk models and more selective choice of business partners have clearly made the case for a reduction of commercial banks’ intermediation. With respect to the non-banking financial industry, two things stand out: the sheer growth in assets (at least in the mutual funds industry and in the pension funds industry, rising each to around 3 bln EUR from close to nothing 5 years ago). Such asset growth is linked to the increased savings propensity, the increasing bank liquidity and the related reduction in interest rates. A second notable thing is the assets structure which is heavily dominated by fixed income assets, deemed by the public as well as regulators as low risk investments (in some cases even presented – wrongly of course – as zero risk investments). 

The result of the above trends is that now we have a financial industry that is somewhat disconnected from the real needs of the economy or at least of what is required to generate a lasting economic growth trend. That is because, even though the size of financial resources has not been reduced, they are mostly channeled back towards the public authorities – either the government through the issuance of government bonds or the central bank via the excess liquidity placed with them by commercial banks (see for instance the destination of the ECB’s two LTRO programs which eventually made it back to its coffers or to investments into government bonds). Neither of the two official actors is currently capable of providing decisive support to the economy (the government because of the lack of “fiscal space” and the central bank because of the lack of such mandate).

Q: In your view, which could be the supporting viable alternative solutions for the real economy funding in the current economic context in Romania?

A: The above highlighted lack of efficiency of the capital market with respect to channeling available financial resources towards the real needs of a self-sustaining economic growth is probably the biggest challenge faced currently not only in Romania, but all over Europe. However, I think in our case the solution is somewhat handier than at European level, if only because of our economy’s low size and complexity, as well as the clear gaps that need to be filled (the lack of proper road infrastructure to give you the most banal example). What the economy needs from financial markets right now is to bring risk back in. Someone needs to believe in a project before it actually happens and before it can show a track record. If you ask people separately however they all want the other party to take the bulk of the risk: central bank points to bankers that they should start lending again, to take back credit risk on their books; bankers on the other hand point back to the central bank that itself should take on greater financial stability risk by weakening some of its regulatory restrictions. Politicians point to pension funds and investment funds that they should take on riskier investments in the interest of society; fund managers however point back to regulatory and political pressure on keeping the system as a whole safe of financial stability risks, safe of as many risks as possible in fact. And so on and so forth. In order to make things work, however, you need some burden sharing by all. There needs to be a grand bargaining between actors of the financial market and it can be done, because, fortunately in this case, they are not as many. For example in the case of the capital market, there is now one regulatory and supervisory authority, only a bunch of buy side players, only a few banks and brokers that remain active in size. And there is a government which has access to expertize from international financial institutions. And to free funds from the European Union.

As in the adage: “if there’s a will, there’s a way”, I don’t think the form of the funding solutions is key here. You can set up a project that can attract financing from banks via credit facilities or properly collateralized investment loans, from the buy side via senior or subordinated bonds or via equity in a project company etc. Like with our recent great achievements of joining NATO and EU, what you need however is for that project to be part of a common vision that brings people together, committed for the long term and most importantly ready to sacrifice other short term aspirations for its sake. Maybe that’s what we should vote for in the upcoming elections and not for whoever candidate whatever political party puts up for the roaster in whichever constituency and under whatever electoral rule suits them best. 


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